IB Interest Rate - Brief Aussie implied rates surge on employment data

By Andrew Wilkinson

September 9, 2010 8:23 PM GMT

Thursday September 9, 2010

There seemed to be good news all round on Thursday with risk appetite slowly gathering a head of steam. The better risk environment remains tempered by the clouds gathering over peripheral Europe as dealers remain skeptical over holding paper issued by governments thought most likely to default. But the emergence of further threats to stability was today's theme after ECB member Juergen Stark warned on the ill-health of German banks. Long ends were further soured by a go-go jobs report from Australia where the improving economy raises the odds of a further monetary tightening.

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Australian bills - The strong Australian employment report changed the tone of the money market severely on Thursday. Ahead of the report showing employers had created 30,900 additional roles, the odds of a rate increase at the October meeting were soft at just 7%. However, employers have now created 55,900 jobs in the past two months, reducing the rate of unemployment to 5.1%. In particular money traders are worried that the boost to full-time employment of around 55,000 positions might have sent a strong "cool-it" warning to the RBA. Aussie bill prices slid on the back of the report sending implieds almost one-quarter of one percent higher. 10-year government bond yields rose by five basis points to 4.97%. The odds of an increase rose to 22% according to market data.

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Canadian bills - Dealers maintained downside pressure on Canadian bill prices, continuing the upside trajectory for yields ahead of a Friday employment rate in which employers are expected to have added 30,000 more jobs. The central bank's 25 basis point increase was put into perspective with the overall policy stance now described as a "modest tightening," that keeps policy "exceptionally accommodative." The change in the market expectation for year end cash rates has shifted from 1.06% at the end of August to 1.37% today. 10-year government bond yields are higher by five basis points today at 2.961%.

European bond markets - The hourly bar chart for the December bund contract looks decidedly ugly as a bearish flag unfurls. The contract attempted a small rally this morning to a high of 131.69 but turned tail as Herr Stark's warning over the deteriorating health of the German banking system emerged in the FT Deutschland newspaper. If the bund contract breaks to a new intraday low before trading closes it has an ultimate downside target of a further 100 ticks to 129.70 from the current 130.78. Shorter-dated euribor contracts also slipped by six basis points possibly over fears of worsening credit market conditions.

British gilts - Short sterling futures rose at the front end of the curve following the Bank of England's decision to leave its policy stance alone today. However, the steepening of the curve saw the December one-year calendar spread widen by as much as nine basis points today to 44 basis points. The December gilt future slumped 64 ticks to 123.15 to yield 3.05%.

Eurodollar futures - Deferred Eurodollar futures fell out of bed following a tamer climate for risk. Back month contracts slipped by up to 15 basis points as initial claims data released today fell to 450,000. Expectations had centered on a reading of 470,000 first time claims. December treasury note futures slid 20 ticks to 123-26 with the yield rising by six basis points to 2.713%.

Japanese bonds -Bond futures were little changed as stocks steadied and all eyes remained on the strengthening yen. The 10-year JGB closed with a yield of 1.115% and as the December contract gained eight ticks to close at 141.64.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

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Andrew Wilkinson
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